‘Unloved’ Funds Good Buys, Morningstar Says

Hold your nose. Buy one mutual fund from each of the three most “unloved” categories from the year before. And hold them for the next three years.

Investors can win ugly following such a strategy, according to Morningstar Inc., whose unloved recommendations from 2000 were announced Friday. There’s a theme this time: The most out-of-favor mutual fund categories are Pacific/Asia excluding Japan, diversified Pacific/Asia and Japan.

The Chicago-based research firm doesn’t consider performance when it selects the least popular fund categories. It looks instead at how the cash flow from investors to each group of funds has changed in a given year. Morningstar’s report didn’t recommend specific funds within each category, but the firm’s analysts provide critiques of many retail funds at the Web site https://www.morningstar.com.

The strategy may seem unlikely, because it calls for buying what everyone appears eager to dump. But Morningstar says the most reviled categories have beaten the average equity fund more than 75% of the time since 1987 in the succeeding three-year span.

Funds investing in Asia lost almost a quarter of their value in 2000 as markets in the region tumbled.

Morningstar suggests limiting these unloved investments to a small portion of one’s portfolio, especially in a year such as this when the funds may overlap. And it suggests restricting the strategy to a tax-advantaged retirement account, where portfolio turnover won’t trigger tax liability.